The reduction of share capital represents a way to adjust the share capital to the constraints of a deficit financial situation or to the narrowing of the company’s object of activity. Companies usually turn to share capital reductions when they face significant financial losses for an extended period.
Therefore, a decrease in share capital can be caused by strategic considerations (acquisition and cancellation of own shares to prevent the takeover of the company by other individuals), by the failure to fulfill commitments made by certain associates (who have not paid their subscribed contributions by the due date), or in some situations, by the withdrawal of an associate or shareholder or the exclusion of an associate.
The share capital includes the cash and in-kind contributions of the associates participating in the establishment of the company. In the company’s balance sheet, the share capital is recorded on the liabilities side as an obligation of the company to the associates.
The nominal share capital remains fixed throughout the company’s existence, meaning that the value of the company’s assets must be at least equal to the share capital. The legislator provides for the obligation to replenish or reduce it in accordance with Law no. 31/1990, republished and amended.
Firstly, the reduction of share capital can be achieved either by reducing the number of shares/participations or by reducing the nominal value of shares/participations or by acquiring own shares and subsequently canceling them.
Secondly, according to Art. 207 of Law no. 31/1990, share capital can be reduced in the following situations:
a) reducing the number of shares or participations;
b) reducing the nominal value of shares or participations;
c) acquiring own shares, followed by their cancellation.
Moreover, in the situation where the reduction of a company’s share capital is not motivated by specific losses, it can be undertaken by:
a) granting total or partial exemption from contributions to the associates;
b) reimbursing shareholders with a proportional part of the contributions, calculated equally for each share or participation;
c) other procedures provided by law.
Regarding the decision-making competence for the adoption of share capital reduction, Art. 113 of Law no. 31/1990 on commercial companies states that the general meeting (extraordinary in the case of joint-stock companies) shall convene whenever it is necessary to make a decision for “g) reducing the share capital or replenishing it through the issuance of new shares.”
According to Art. 208 of Law no. 31/1990, the reduction of share capital can only be carried out after two months have passed from the day the decision was published in the Official Gazette of Romania, Part IV. Additionally, the decision must comply with the minimum share capital, where the law establishes it, and must mention the arguments underlying the reduction of share capital.
Specifically, for the reduction of share capital, the general meeting will adopt a decision, with the quorum and majority required by law and statutory regulations, and respecting the legal minimum of capital, according to the legal form of the company (limited liability company, joint-stock companies, limited partnership with shares).
In addition, the decision will develop the reasons for the reduction (financial losses, narrowing of activity, withdrawal or exclusion of an associate, etc.) as well as the process that will be applied to achieve it.
On the other hand, creditors of the company have the right to oppose this decision when their interests are affected by the decision to reduce the share capital. Thus, creditors whose claims are prior to the publication of the decision will be entitled to obtain guarantees for the claims that have not become due by the date of said publication. Otherwise, the court may compel the company to provide these guarantees.
Among the documents required for registering the mention at the Trade Registry Office for the reduction of share capital, we mention: the decision of the general meeting of associates/shareholders or the decision of the single associate, the updated articles of incorporation with the new structure of share capital, the extract from the Official Gazette of Romania, Part IV, in which the decision to reduce share capital was published, etc.
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